China and Finland – mutual lessons in corporate financing
China is a major economic power. Finland, in comparison, may be a small player, but it does have knowhow that appeals to China: financing small and medium-sized enterprises (SMEs).
China is eager to develop its SME sector, but the financing is not functioning as desired. The credit risks posed by Chinese SMEs are high, and banks have incurred massive credit losses. This is not the case in Finland.
Finnvera, a Finnish state-owned special-purpose company, provides financing to SMEs, supplementing the financial markets especially when companies struggle to secure financing from banks, for instance. Over half of Finnvera’s SME and mid-cap financing exposures fall within the risk category B2, a category for companies that generally find it challenging to secure market-based financing due to collateral shortfall. At Finnvera, the credit losses have remained low even though such companies are subject to normal financing arrangements.
The reason for this is that any decision to finance an SME or large corporation is based on a thorough analysis and risk assessment, a process that is supported by the business and credit information system in Finland. The system makes it easy to obtain data on the financial situation of companies by ensuring their financial statements are readily available.
No such system is in place in China. Conducting risk analyses based on financial statements is consequently challenging, as the data must be gathered from a sundry of sources. The Chinese are keen to learn from us how to analyse SMEs’ credit risks in advance.
As my responsibilities deal with funding large corporations and analysing the country-specific risks associated with export projects, it has been a surprise that the questions I have faced in meetings with the Chinese have often veered toward financing SMEs. Based on the discussions, China is also interested in learning how Finns allocate financing to maximise its impact.
China is also interested in learning how Finns allocate financing to maximise its impact
Impact, along with risk management, is a central objective for Finnvera. Our objective is to enable companies to achieve something that would be impossible without our financing – be it growth, investments, recruitments or internationalisation.
Financing export transactions is another story entirely. Our impact assessments show that our financing arrangements, export credit guarantees and buyer credit guarantees are regarded as crucial for competitiveness by major export-oriented companies in Finland. Competition has become fiercer, and typically companies must offer not only an excellent product, but also a financial package to buyers to be able to compete. We at Finnvera are luckily able to offer this tool to companies, but so are our counterparts in Finland’s rival countries, including China.
This is an area where Finland could learn from China. China is a potential market not only for large corporations operating in Finland, but also for SMEs. Moreover, Chinese buyers are increasingly interested in the use and functioning of western financing channels.
Finnvera granted 93 million euros worth of export guarantees to China in 2018, signalling a dramatic change from the previous year’s three million euros and the rather modest demand over the past couple of decades. We are eager to find out whether the surge is attributable to large individual transactions or a more permanent increase in the demand for export guarantees.
I have had the opportunity to spend three months in Shanghai studying the Chinese financial market. My goal is to gather information that will benefit Finnish export-oriented companies in their future projects in China.
China, therefore, is eager to learn how we finance SMEs. And as representatives of the small Finland, we are eager to learn about the operations of large Chinese buyers and financial markets – even if the concepts are prone to criss-crossing each other merrily: a Chinese SME could be a major corporation in Finland.